©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-1 Accounting Information Systems 9 th Edition Marshall B. Romney Paul John Steinbart

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-2 The Expenditure Cycle: Purchasing and Cash Disbursements Chapter 12

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-3 Learning Objectives 1. Describe the basic business activities and related data processing operations performed in the expenditure cycle. 2. Discuss the key decisions that need to be made in the expenditure cycle, and identify the information needed to make those decisions. 3. Document your understanding of expenditure cycle activities.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-4 Learning Objectives 4. Identify major threats in the expenditure cycle, and evaluate the adequacy of various control procedures for dealing with them. 5. Read and understand a data model (REA diagram) of the expenditure cycle.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-5 Introduction Linda Spurgeon, Alpha Omega Electronics’ (AOE) president, asked Elizabeth Venko, the controller, to address the following issues: What must be done to ensure that AOE’s inventory records are current and accurate? What can be done to ensure timely delivery of quality components?

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-6 Introduction Is it possible to reduce AOE’s investment in materials inventories? What must be done to ensure that available discounts are taken? How could the information system provide better information to guide planning and production? How could IT be used to reengineer expenditure cycle activities?

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-7 Learning Objective 1 Describe the basic business activities and related data processing operations performed in the expenditure cycle.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-8 Expenditure Cycle: Main Objective The primary objective of the expenditure cycle is to minimize the total cost of acquiring and maintaining inventories, supplies, and the various services necessary for the organization to function.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 12-9 Expenditure Cycle: Key Decisions What is the optimal level of inventory and supplies to carry? Which suppliers provide the best quality and service at the best prices? Where should inventories and supplies be held? How can the organization consolidate purchases across units to obtain optimal prices?

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Expenditure Cycle: Key Decisions How can information technology be used to improve both the efficiency and accuracy of the inbound logistics function? Is sufficient cash available to take advantage of any discounts suppliers offer? How can payments to vendors be managed to maximize cash flow?

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Expenditure Cycle Business Activities The expenditure cycle is a recurring set of business and related information processing operations associated with the purchase of and payment for goods and services. The first function of the AIS is to support the effective performance of the organization’s business activities.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Expenditure Cycle Business Activities What are the five basic expenditure cycle business activities? 1 Requesting the purchase of needed goods 2 Ordering goods to be purchased 3 Receiving ordered goods 4 Approving vendor invoices for payment 5 Paying for goods purchased

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Request Goods (Activity 1) The first major business activity in the expenditure cycle involves the request to purchase inventory or supplies. The traditional inventory control method (often called economic order quantity [EOQ]): This approach is based on calculating an optimal order size so as to minimize the sum of ordering, carrying, and stockout costs.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Request Goods (Activity 1) Alternative inventory control methods: – MRP (material requirement planning) This approach seeks to reduce required inventory levels by scheduling production, rather than estimating needs. – JIT (just in time) JIT systems attempt to minimize both carrying and stockout costs.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Request Goods (Activity 1) What is a major difference between MRP and JIT? MRP systems schedule production to meet estimated sales need, thereby creating a stock of finished goods inventory. JIT systems schedule production to meet customer demands, thereby virtually eliminating finished goods inventory.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Request Goods (Activity 1) Documents and procedures: The purchase requisition is a document that identifies the following: – requisitioner and item number – specifies the delivery location and date needed – specifies descriptions, quantity, and price of each item requested – may suggest a vendor

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Order Goods What is a key decision? – determine vendor What factors should be considered? – price – quality of materials – dependability in making deliveries

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Order Goods Documents and procedures: The purchase order is a document that formally requests a vendor to sell and deliver specified products at designated prices. It is also a promise to pay and becomes a contract once it is accepted by the vendor. Frequently, several purchase orders are generated to fill one purchase requisition.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Receive and Store Goods (Activity 2) The second major business activity involves the receipt and storage of ordered items. Key decisions and information needs: The receiving department has two major responsibilities: 1 Deciding whether to accept a delivery 2 Verifying quantity and quality

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Receive and Store Goods (Activity 3) Documents and procedures: The receiving report documents details about each delivery, including the date received, shipper, vendor, and purchase order number. For each item received, it shows the item number, description, unit of measure, and count of the quantity received.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Approve Vendor Invoices (Activity 3) The third activity entails approving vendor invoices for payments. Key decisions and information needs: The objective of accounts payable is to authorize payment only for goods and services that were ordered and actually received. This requires internally generated information from both the purchasing and receiving function.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Approve Vendor Invoices (Activity 3) Documents, records, and procedures: There are two basic ways to process vendor invoices: 1 Nonvoucher system 2 Voucher system – disbursement voucher – voucher package

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Pay for Goods The final activity is the payment of approved invoices. What is a key decision? – taking vendor discounts A short-term cash flow budget is useful for making this decision.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Pay for Goods Documents, records, and procedures: The cashier receives and reviews each voucher package, – computes a batch total, and – enters the disbursement data. The system uses the voucher file to update the accounts payable, open invoice, and the general ledger files.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Opportunities for Using Information Technology What are some opportunities of using information technology for requesting goods (Activity 1)? – online data entry instead of paper documents – bar-code technology that facilitates the maintenance of accurate perpetual inventory records

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Opportunities for Using Information Technology - electronic data interchange (EDI) - procurement cards - Internet

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Opportunities for Using Information Technology What are some opportunities of using information technology to receive and store goods (Activity 2)? – vendor requirement to bar-code all of their products – passive radio frequency identification – satellite technology

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Opportunities for Using Information Technology What are some opportunities of using information technology to approve vendor invoices (Activity 3)? – electronic data interchange (EDI) – elimination of vendor invoices entirely – image processing and optical character recognition (OCR) – corporate credit cards

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Opportunities for Using Information Technology – electronic funds transfers (EFT) – financial electronic data interchange (FEDI)

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Learning Objective 2 Discuss the key decisions that need to be made in the expenditure cycle, and identify the information needed to make those decisions.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Information Needs The third function of the AIS is to provide information useful for decision making. Usefulness in the expenditure cycle means that the AIS must provide the operational information needed to perform the following functions: Determine when and how much additional inventory to order.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Information Needs Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices. Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Information Needs What are examples of additional information the AIS should provide? – efficiency and effectiveness of the purchasing department – analyses of vendor performance such as on- time delivery, quality, etc. – time taken to move goods from the receiving dock into production – percentage of purchase discounts taken

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Learning Objective 3 Document your understanding of the expenditure cycle.

Expenditure Cycle Order goods Request goods Various departments Inventory control Notice shortages R eorder point Copy of purchase order

Expenditure Cycle Receive goods Order goods Receipt of goods Back orders Production cycle Revenue cycle Needs Inventory Vendor Receiving report Purchase order

Expenditure Cycle Purchase Order Packing slip Receiving A From purchasing Verify order, count, and inspect From suppliers

Expenditure Cycle Accounts Payable Compare, review, verify accuracy From purchasing From stores From vendor Receiving report Purchase order Invoice N

Expenditure Cycle Invoice Cashier From A/P Batch totals Receiving report A Purchase order Disbursement voucher Review and compute batch total Batch total Compare and reconcile

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Learning Objective 4 Identify major threats in the expenditure cycle, and evaluate the adequacy of various control procedures for dealing with them.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Control Objectives, Threats, and Procedures The second function of a well-designed AIS is to provide adequate controls to ensure that the following objectives are met: Transactions are properly authorized. Recorded transactions are valid. Valid, authorized transactions are recorded. Transactions are recorded accurately.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Control Objectives, Threats, and Procedures Assets (cash, inventory, and data) are safeguarded from loss or theft. Business activities are performed efficiently and effectively.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Control Objectives, Threats, and Procedures What are some threats? – stockouts – purchasing too many or unnecessary goods – purchasing goods at inflated prices – purchasing goods of inferior quality – purchasing from unauthorized vendors – kickbacks

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Control Objectives, Threats, and Procedures – receiving unordered goods – errors in counting goods – theft of inventory – failure to take available purchasing discounts – errors in recording and posting purchases and payments – loss of data

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Control Objectives, Threats, and Procedures What are some exposures? – production delays and lost sales – increased inventory costs – cost overruns – inferior quality of purchased goods – inflated prices – violation of laws or import quotas – payment for items not received

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Control Objectives, Threats, and Procedures – inaccurate inventory records – loss of assets – cash flow problems – overstated expenses – incorrect data for decision making

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Control Objectives, Threats, and Procedures What are some control procedures? – inventory control system – vendor performance analysis – approved purchase requisitions – restricted access to blank purchase requisitions – price list consultation – budgetary controls

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Control Objectives, Threats, and Procedures – use of approved vendor lists – approval of purchase orders – prenumbered purchase orders – prohibition of gifts from vendors – incentives to count all deliveries – physical access control – recheck of invoice accuracy – cancellation of voucher package

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Learning Objective 5 Read and understand a data model (REA diagram) of the expenditure cycle.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Expenditure Cycle Data Model The REA data model integrates both traditional accounting transactions data with other operational data. What are some examples? – the date and amount of each purchase – information about where items are stored – vendor performance measures, such as delivery date

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Expenditure Cycle Data Model Partial REA Diagram of the Expenditure Cycle Inventory (1, N) Order inventory Order goods (1, N) Request goods Fills Request inventory (1, N) (1, 1) (1, N)

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Expenditure Cycle Data Model The REA diagram models the relationship between the request goods and order goods events as being many-to-one. Why? The company sometimes issues purchase orders for individual purchase requests. At other times it takes advantage of volume discounts by issuing one purchase order for a set of requests.

Expenditure Cycle Data Model Partial REA Diagram of the Expenditure Cycle Inventory (1, N) Receive inventory Receive goods (1, N) Order goods (0, N) (1, N) Order/Receive

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Expenditure Cycle Data Model Why is there a many-to-many relationship between the order goods and receive goods events? Vendors sometimes make several separate deliveries to fill one purchase order. Other times, vendors fill several purchase orders with one delivery. Sometimes, vendors make a delivery to fill a single purchase order in full.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Case Conclusion What are the key points that Elizabeth Venko proposed? 1 Online terminals in each of AOE’s departments 2 JIT inventory system 3 Use of EDI to send purchase orders to vendors 4 Use of EFT as much as possible 5 Implementation of a relational data base

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart End of Chapter 12